Now that the election season is over, two words are making headlines and crossing the lips of pundits and politicians more than any others: “fiscal cliff.” It’s almost December, and that means that in a little over a month, unless Congress can agree on a new deficit reduction plan, a package of major tax hikes and draconian spending cuts will automatically take effect. According to the Congressional Budget Office, the $500 billion in tax increases and over $65 billion in spending cuts outlined in the Budget Control Act of 2011 would send our fragile economy back into a recession.

Before you get too worried, if January 1^st does come and go there are unlikely to be any immediate economic consequences. As far as the tax hikes go, the Treasury Department and the Internal Revenue Service have a good deal of flexibility as to when they actually begin implementing higher tax rates. Even if they do go into effect in January, if a new deal is reached early enough in the year, the tax hikes could be retroactively reversed.

What about those spending cuts that would affect almost every federal program, from defense spending to Medicare? Would contracts be cut, jobs be lost, and benefits take a hit if no deal is reached by the end of December? Not at all. In fact the Budget Control Act doesn’t specify when in 2013 the cuts would need to take place. By law, not a cent would need to be cut by the end of January.

So what many are calling the “fiscal cliff” is better described (and has been by most economists) as a “fiscal slope.” The January 1^st deadline is really a bunch of hype, and that makes sense. It’s a much better news story, and it allows politicians to play a game of political chicken, which really seems to be the only reason the Budget Control Act of 2011 was passed in the first place.

This is important to realize when thinking about or fretting over the fiscal cliff. In economic terms, this an imaginary crisis. A crisis that, like the debt ceiling debacle which lead to the Budget Control Act in 2011, was politically contrived. With all of the deficit scare rhetoric that’s taken center stage in our political and public debates over the past few years, this probably sounds crazy, but I have to break it to you: there is no budget crisis, at least not in the short-term. After years of worry, there has been no run on U.S. Treasury bonds, and plenty of people the world over are more than willing (as evidenced by historically low interest rates on U.S. government bonds) to extend us credit.

So, now that we can see the fiscal cliff for what it is — a hyped up, politically contrived crisis — what should be done? Well with this on the table, perhaps the most sensible course of action would be to simply repeal the Budget Control Act of 2011. Of course, our deficit does have to be dealt with eventually; our tax system should be restructured, and there are sensible ways to go about cutting spending where programs are inefficient. But these are not immediate problems, so instead of holding the economy hostage with the threat of shock therapy type cuts and tax hikes, maybe politicians should scrap the deadline and work out a sensible deal over time.

This, of course, would never happen. Both the left and the right have too much stake in this fight simply to call the whole thing off. Politicians wanted a showdown over economic policy, so they created one. If this sort of political recklessness continues — and here I am somewhat optimistic that it will not — and Democrats and Republicans are not able to compromise on a deal that will have to have both less tax increases and less spending cuts, well, one party may come out ahead. One party will look to have been more willing to compromise, and another will likely receive most of the blame. But it will be our economy that is the real loser.

By:  Mike Guisinger

(Photo by DonkeyHotey under a Creative Commons License)